DealLawyers.com Blog

On Monday, in a memorandum opinion in Wright v. Farello et al. (Del. Ch.; 10/25), Chancellor McCormick dismissed claims that an advance-notice bylaw was facially invalid. While the bylaw at issue was “long, broad, and overly complicated,” a stockholder could comprehend it, even if doing so took “a good bit of work.”

Defendants first argued that the plaintiff’s challenge was not ripe, citing the Chancery Court’s April decision in Siegel v. Morse because “Plaintiff does not—and cannot—allege that he or any other stockholder attempted to nominate a director and does not allege that any such effort was rejected by the Board.” Chancellor McCormick distinguished that case since Siegel disclaimed a facial validity challenge. She said Delaware’s approach leaves the determination to the courts and concluded that it was appropriate to resolve this matter on the merits.

A facial challenge presents a pure question of law, the material facts are static, and there is thus no need to postpone resolution to allow for the question to arise in a more concrete form. For that reason, Delaware courts routinely resolve facial challenges without undertaking ripeness analyses.

Plaintiff argued that the bylaw is unintelligible and that complying with it is impossible. While Chancellor McCormick said, “the Acting-in-Concert Provision is a sea of subparts, which take a bit of effort to comprehend,” and spent seven pages discussing its requirements before diving into the facial invalidity analysis, she ultimately disagreed with the plaintiff.

“[U]nintelligible” means that the words are incomprehensible. That is, a person cannot comprehend their meaning. Kellner captures the commonsense understanding that sometimes a complicated provision is so convoluted as to make zero sense. When a rule crosses the line from hard-to-understand to unintelligible, then no one will know how to apply it. At that point, the rule “cannot operate lawfully under any set of circumstances” because it cannot operate at all.

The Bylaw is a lot to take in. Parts of it are quite broad. And others are confusing. But does it cross the line to unintelligible? . . . [A] provision’s breadth does not necessarily render it unintelligible. Broad in this context means “extending far and wide.” That is not the same as incomprehensible. Parts A through C are broad because they cover an expansive set of conduct. But (with a good bit of work) a stockholder can comprehend them.

Plaintiff also criticized the daisy chain provision for requiring nominating stockholders to disclose persons unknown to them. To this, Chancellor McCormick said:

[W]hat the Bylaw effectively does is impose on any Proposing Person the obligation to ask the people with whom she is Acting in Concert whether they are acting in concert with anyone else. In this way, the Bylaw imposes an investigative burden on the Proposing Person.

A stockholder might rightly take issue with that requirement as burdensome to the point of unreasonable. But where a party brings a facial challenge to a bylaw, the court does not assess reasonableness—that analysis is reserved for as-applied challenges. The investigative burden imposed by the Bylaw is onerous. But it does not render the Bylaw unintelligible.

This provision was also not impossible to comply with — it just required some investigation.

– Meredith Ervine